Question

Historical Returns: Expected and Required Rates of Return You have observed the following returns over time: Stock y 13% Market 13% Year 2014 2015 2016 2017 2018 Stock X 15% 17 -12 -4 3 2 -12 3 18 Assume that the risk-free rate is 4% and the market risk premium is 3%. a. What are the betas of Stocks X and Y? Do not round intermediate calculations. Round your answers to two decimal places. Stock X: Stock Y: b. What are the required rates of return on Stocks X and Y? Do not round intermediate calculations. Round your answers to two decimal places. Stock X: % % Stock Y: c. What is the required rate of return on a portfolio consisting of 80% of Stock X and 20% of Stock Y? Do not round intermediate calculations. Round your answer to two decimal places.

Answer 1

Beta X Beta Y 1.20 0.52 Year 2014 2015 2016 2017 2018 0.8 Stock X 15% 17% -12% 2% 24% 0.2 Stock y 13% 6% -4% 3% 9% Market 13% 8% -12% 3% | 18% Risk free rate Market Risk premium Required return on X Required return on Y Required Portfolio return 4% 3% 7.61% 5.55% 7.19%

Formulae

Beta X Beta Y =SLOPE(B420:B424,D420:0424) |=SLOPE(C420:C424,D420:D424) 0.8 Stock X 0.15 0.17 -0.12 0.02 0.24 =1-B418 Stock Y 0.13 0.06 -0.04 0.03 0.09 Market 0.13 0.08 -0.12 0.03 0.18 418 419 Year 420 2014 421 2015 422 2016 423 2017 424 2018 425 426 427 Risk free rate 428 Market Risk premium 429 Required return on X 430 Required return on Y 431 Required Portfolio return 0.04 0.03 =B427+(E420*B428) =B427+(F420*B428) =(B418*B429)+(C418*B430)